Private contractors, public headaches

VITA problems raise questions about outsourcing state projects

In theory, Virginia’s ongoing fiscal crisis should lead to greater privatization of government services. The hypothesis goes like this: with tax revenues in sharp decline, state agencies increasingly will rely on private companies to deliver more government services, both with greater efficiency and at lower cost to citizens.

Virginia has a proven track record of tapping private contractors to build much-needed roads, bridges and state facilities. As recent events show, other privatization experiments remain at the “trial and error” stage.

The commonwealth’s most celebrated experiment with privatization continues to make headlines for the wrong reasons. It involves a fitful attempt by private contractor Northrop Grumman Corp. to revamp antiquated computer systems used by roughly 90 state government agencies. Northrop Grumman was hired in 2006 to carry out the work on behalf of the Virginia Information Technologies Agency, or VITA, which oversees the state’s technology networks.

The $2.3 billion, 10-year contract is the richest ever awarded by Virginia to a private company. At the time, state officials hailed the deal as a blueprint that other state governments would emulate.
But transforming information technology systems is proving surprisingly difficult for Northrop Grumman, whose Fairfax County-based information technology division is in charge of the project. Once touted as a model for other states, the IT contract has been beset by project delays, spotty performance, and a highly publicized billing dispute.

Northrop Grumman missed a June deadline for consolidating state-run networks into a privately managed system. That month VITA chief Lemuel C Stewart urged its board to withhold a scheduled $14 million payment as punishment for poor service and inadequate billing. Instead, the board decided to fire Stewart and pay Northrop Grumman the money.

Both sides shoulder some blame, according to two reports issued this year by the Joint Legislative Audit and Review Commission (JLARC), an arm of the Virginia General Assembly. JLARC has chastised Northrop Grumman for “inadequate planning,” while blaming “reluctance by some agencies to support transformation” with contributing to project delays.

Still up in the air is whether state lawmakers will approve additional money for Northrop Grumman, which told JLARC that it is losing $30 million to $40 million a year on the project. Under the existing contract, Northrop Grumman’s payments from the state are capped at $236 million a year, although the total can be exceeded if inflation kicks in or additional purchases of IT services are made, according to the JLARC report.

In its latest report, released last month, JLARC says dumping Northrop Grumman as its IT contractor would cost the commonwealth $400 million in penalties — money that the cash-strapped state government doesn’t have. JLARC also suggested that the head of VITA be appointed by the governor rather than an oversight board.

Meanwhile, the two sides are trying to repair their differences. Although Northrop Grumman declined interview requests, VITA spokeswoman Marcella Williamson says the two sides “are in the process of reorganizing their respective organizations to enhance customer service and responsiveness, foster teamwork and greater accountability, remove bureaucracy, reduce costs, and streamline processes.”

A sobering reminder
Experts say that, by itself, the Northrop Grumman-VITA dustup probably won’t be enough to torpedo future public-private contracts at the state level. Nevertheless, it’s a sobering reminder of the difficulties involved in ensuring that privatization is the best course of action. Business and political leaders may want to weigh any future deals with a dose of healthy skepticism.

“The IT contract has caused us as a state to look more closely at these types of deals, and I think that’s a good idea. I don’t think the bar is impossibly high for public-private partnerships now, but the bar has certainly been raised,” says James V. Koch, an economics professor at Old Dominion University and its president emeritus.

Koch’s advice is especially important as the Virginia Port Authority contemplates whether to outsource the operation of its sprawling port facilities in Hampton Roads. Three private companies have submitted bids, including CenterPoint Properties Trust, The Carlyle Group and Carrix Inc.

State lawmakers last year may have missed an opportunity to exert better control over the process. A bill to create a Government Efficiency Review Commission sailed through the House of Delegates by a vote of 95-3. But the measure stalled in the Senate. The commission would have been empowered to examine state agencies in all branches of state government, says Del. John O’Bannon, a Henrico County Republican who sponsored the bill.

In light of the problematic IT partnership, it is possible legislators will revisit the privatization issue when the General Assembly convenes in January.
“Red flags are going up, and one is the issue of [reducing] costs. Second is the brain drain, and I think this particularly is very true of the VITA situation: once you contract out, then you [risk] losing your in-house capability,” says Blue Wooldridge, a professor of business administration at Virginia Commonwealth University.

Law used for roads
Perhaps, but Virginia can boast a number of successful public-private arrangements, particularly for roads, schools and other state facilities. It’s been nearly 15 years since state lawmakers enacted the Virginia Public-Private Transportation Act of 1995, or PPTA. The law paved the way for private contractors to submit construction bids for much-needed state highways and other transportation improvements.

“The PPTA is widely regarded as one of the best state statutes on the books anywhere in the country,” says Art Smith, chairman of the National Council on Public-Private Partnerships, a trade group in Arlington. Smith also is president of Management Analysis Inc., a Vienna-based management consulting firm.

Partnering with the private sector helps Virginia avoid huge upfront capital costs and pursue projects that otherwise might be delayed or even postponed. Interstate 895 and state route 288 in the Richmond area, and the four-lane expansion of Route 199 along the Williamsburg-Jamestown corridor are the earliest manifestations of the PPTA. Anyone driving to Washington, D.C., also is aware of ongoing work to install high-occupancy toll lanes along a 14-mile stretch of Interstate 495.

Nonetheless, even transportation projects can be problematic. In Richmond, the Pocahontas Parkway has suffered from lower-than-expected traffic volume and, consequently, revenue shortages and increased tolls. A similar problem dogged the Dulles Greenway in Northern Virginia, with several rounds of additional financing needed to keep the private road afloat.

Similarly, the Public Private Education Facilities and Infrastructure Act of 2002 has led to construction of several new state-run facilities. Included are Hancock Geriatric Treatment Center in Williamsburg, South County Secondary School in Lorton, and a parking deck in Fredericksburg’s Historic District. Still, Smith acknowledges that privatization has its limits.

“If I need a new road to connect points A and B, I could probably predict pretty accurately the type of road I’ll need 10 years from now. If I need a school, I could pretty accurately predict that capacity I’ll need. But when looking at IT, that future needs becomes much more complex,” since technology changes rapidly, Smith says.

Model used by other states
Virginia isn’t alone in forging partnerships with the private sector, but it was one of the first in the country to aggressively pursue the strategy. Other states since have followed Virginia’s lead. Roughly half of all U.S. states have passed legislation creating public-private transportation authorities, says Leonard Gilroy, director of government reform with Reason Foundation, a think tank in Washington, D.C. Even states that traditionally have resisted the idea, including Michigan, New York and California, have formed study commissions to explore it.
Still, as with IT in Virginia, not every facet of state government lends itself to privatization. Indiana officials have threatened to scrap a $1 billion privatization of the state’s welfare system after a series of service mistakes made by the two contractors in charge: IBM Corp. and Affiliated Computer Services Inc. Thus far the deal remains in force, but Indiana officials have demanded that the contractors correct nearly 40 major gaps in the way welfare cases are handled.
Virginia’s infrastructure won’t quit aging simply because the state is short of funds. Raising taxes to cover the need appears to be a nonstarter. All of which indicates more partnerships are in the offing for Virginia, not fewer. Says Koch: “We should look at each one of these situations and ask: ‘Is this a good idea or not?’”